Financial fraud is on the increase as economic difficulties mount, but it is
easy to avoid.

As Britain's economic woes worsen, more and more people are becoming vulnerable to financial tricks and scams. According to the Office of Fair Trading (OFT) an estimated three million people a year fall victim to scams sent by post, text, and email. The organisation fears that this number may rise as more people face financial difficulties.

John Fingleton, its chief executive, said: "Scammers are sophisticated at targeting people who are often the most vulnerable in society." The best way to be sure that you do not fall victim is to understand the tricks the scammers use.

Roy Gainsford, chief executive of the Trading Standards Institute (TSI), said that people should always stop and think when they receive offers that look too good to be true. "We urge you to ask yourself, 'What's in it for them?' "

Here are the top five financial scams and how they can be spotted.

1. Deceptive Prize Draws or Sweepstakes

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There are two types of prize draw scam and both are illegal. With the first type, you receive a letter saying you have won a large prize. However, you are asked to send a fee to receive it. If you read the small print, it says you are only being entered into a prize draw.

The second type says that you have won a prize but have to order something from a catalogue to receive it. Again the small print makes clear that you are just being entered into a draw. However, it is now illegal under the consumer protection regulations to say someone has won a prize if they then have to pay to receive it, so if you receive a letter like this, it is a scam.

When someone states you have won a large cash prize it is important to scrutinise the letter. Have you knowingly entered a draw or raffle? Does the letter ask for a fee (look out for phrases such as "processing fee" or "administration charge")?

The OFT estimates that more than 500,000 people fall victim every year, collectively losing £320 million. Victims are often repeatedly targeted.

2. Foreign lottery scams

Thousands of people are told every day that they have won thousands or millions of pounds in a foreign lottery. These letters also say you need to pay an administration fee, but the prize does not exist.

Two of the most common scams involve "prizes" in a Canadian or Spanish lottery. According to the Government's Consumer Direct arm, people have lost over £300,000 as they respond to more and more telephone calls demanding payments to cover costs in order to receive their winnings. The winnings don't exist.

Other warning signs that a lottery letter is not genuine include there being a very short time in which you can claim your winnings, use of premium rate phone lines and an invitation to send money out of the country using a money transfer service.

The (genuine) Spanish lottery known as El Gordo has issued a warning about people using its name under false pretences. If you have not bought a ticket for the genuine El Gordo lottery, you have not won it.

3. Advance Fee Fraud

If you have ever received a badly spelt begging letter or email from someone you have never heard of, it is likely that you have been targeted.

The approach can be made by letter, fax, email or telephone, and usually concerns an amount of money that your correspondent needs to get out of their country. The victim is offered a large sum of money as a reward for helping with the transfer.

Typically, the writer claims to be a senior government official, an accountant with a state owned corporation, or perhaps a relative of a deposed or dead politician. It will probably be marked ''Strictly Confidential'' or ''Urgent'', and offer the opportunity to share in a multi-million pound bonanza.

The correspondent says that he or she wants to use your bank account. If you respond with details you will be sent more documents purporting to show that the money is genuine.

You will then be asked to send your bank details and an ''advance fee'' to speed up the transaction. However, once you have sent the money an emergency will arise and they will ask you to send more. Many letters still refer to Nigeria, but there is a Russian version. Often emails are badly spelt and grammatically incorrect.

4. Work at Home/Business Opportunity Scams

This scam is likely to become ever more popular because of rising unemployment. Typically these scams offer a large income for not very much work, such as envelope stuffing, assembling craft items or other easy-sounding jobs. They offer what sounds like a lot of money for this work and usually stress the advantage of working from home 'when it suits you'.

If you sign up you may find that you need to spend money to make photocopies, take out newspaper ads or buy software. If you buy craft kits and make items you may find the promoter will not pay out because your work does not come up to their standards. You may even find it is actually a pyramid selling scheme and the only money available is for getting other people to sign up.

Legitimate work-at-home promoters should tell you the start-up costs as well as what you get for your money. Check whether you can verify information with other workers, and try an internet search on the company.

5.Investment scams

These are often known as ''boiler room scams'' and involve a cold-caller offering shares or property investments. Sometimes these shares and properties exist, but are worth nothing like the amount suggested by your caller. According to the Financial Services Authority (FSA), it is mostly experienced investors who fall for these scams.

Alarm bells should ring if you are called out of the blue, particularly by a company based overseas. You can see whether a firm is legitimate by checking it against the FSA's register of authorised firms on www.fsa.gov.uk/pages/register. If it is not registered it is not allowed to give investment advice in the UK and should be avoided.

You can contact the following organisations for advice; for scams in general – Consumer Direct, Tel: 08454 04 05 06; for investment scams – Financial Services Authority, 0845 606 1234.